Hello, and welcome to the Highwoods Q3 2023 Earnings Call. My name is Alex, and I will be coordinating the call today. I will now hand over to your host Brendan Maiorana, CFO, to begin. Please go ahead.

Thank you, operator, and good morning, everyone. Joining me on the call this morning are Ted Klinck, our Chief Executive Officer; and Brian Leary, our Chief Operating Officer; Hannah True, our Manager of Finance and Corporate Strategy is under the weather. For your convenience, today's prepared remarks have been posted on the web. If you have not received yesterday's earnings release or supplemental, they're both available on the Investors section of our website at highwoods.com. On today's call, our review will include non-GAAP measures such as FFO, NOI, and EBITDAre. The release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Forward-looking statements made during today's call are subject to risks and uncertainties. These risks and uncertainties are discussed at length in our press releases as well as our SEC filings. As you know, actual events and results can differ materially from these forward-looking statements and the Company does not undertake a duty to update any forward-looking statements. With that, I'll turn the call over to Ted.

Thanks, Brendan, and good morning, everyone. During the third quarter, we once again had solid financial and operational results, while maintaining a balance sheet that is among the strongest in the sector with healthy credit metrics and ample liquidity. At the beginning of the year, we predicted the operating environment in capital markets, particularly for the office sector, would remain challenged for an extended period of time. So far, this is playing out as expected. We remain laser-focused on operations and balance sheet management and believe that meaningful new investment opportunities will eventually surface. With this backdrop, these are our priorities. First, ensuring our portfolio operations remain healthy. To that end, we're aggressively addressing future lease roll, proactively reinvesting in those assets with ample opportunity to drive outsized returns, focusing on net effective rents and maintaining strong cash flow by being even more disciplined on discretionary CapEx. Second, continuing to sell non-core assets. Obviously, this is currently challenging, but we continue to believe there will be ready, willing, and able buyers for stabilized assets, especially bite-sized deals. Third, further bolstering our already strong balance sheet by increasing liquidity. And finally, canvassing our markets for future growth opportunities. We firmly believe that having a high-quality, resilient portfolio in the best markets and BBDs in the SunBelt and the balance sheet strength to weather this capital-constrained environment positions us well to capitalize on long-term growth opportunities that will inevitably come with the next cycle, even if this current cycle lasts several more years. Turning to the quarter. We delivered FFO of $0.93 per share and grew same-property cash NOI by 2%. We signed 655,000 square feet of second-gen leases, 19% lower than our trailing five-quarter average. With a steady, albeit modest increase in the return to office across our customer base since Labor Day, we're off to a solid start with our leasing volume so far in the fourth quarter. Our net effective rents continue to be resilient as our year-to-date average is on pace to surpass our prior high watermark and exceed 2019 by 5%. While rent spreads garner more headlines, we have long believed it's more important to measure leasing performance by considering the entirety of lease economics. We’re pleased that net effective rents have remained strong, a direct result of the flight to quality—not just the flight to quality assets but also the flight to quality owners who have access to capital. Our sponsorship is a true differentiator when companies are making leasing decisions, and this has only become more important since the pandemic. I want to provide an update on the former Tivity building in Nashville. Last year, we substantially backfilled the building by signing a 223,000 square foot lease with a single customer that currently leases 50,000 square feet in another Highwoods building. Unfortunately, since that lease execution, this customer has experienced some challenging and unforeseen business conditions that are impacting their growth plans and cash flow. We are currently in discussions with our customer about what makes the most sense going forward for both Highwoods and for them. It's possible we may ultimately decide it's in our best long-term interest to modify their lease, which is scheduled to commence in early 2024. The quarter was quiet on the investment front. We completed three development projects with a total projected investment of $234 million, at our share, that were a combined 30% pre-leased. 2827 Peachtree is 88% pre-leased, and we have an LOI to bring the property to 92%. The other two projects, GlenLake III in Raleigh and Granite Park Six in Dallas aren't projected to stabilize until 2026. We signed a 20,000 square foot lease at Midtown East in Tampa, and we're seeing additional strong interest in this development, which isn't scheduled to be completed until early 2025 and stabilized until mid-2026. At 23Springs, our 642,000 square foot tower in Uptown Dallas, we have LOIs over a pre-leased rate of over 50%. While we didn't close any dispositions during the quarter, we've remained active marketing additional non-core properties for sale. The current environment is obviously challenging, but we're cautiously optimistic we'll close a few smaller deals in the coming months. We've been quiet on acquisition and development announcements this year. I mentioned earlier, we believe there will be significant opportunities in the future. We're consistently in discussions with owners of wishlist assets across our footprint. Lenders are generally being patient with owners, but there is stress in the system, and it will take time for these future opportunities to arise. Our 2023 FFO outlook is unchanged at the midpoint. The steadiness of this year's FFO outlook masks better-than-anticipated NOI being offset by higher interest expense. To that end, we increased the midpoint of our same-property cash NOI outlook to a revised range of 0% to plus 1%. Before I turn the call over to Brian, I'd like to summarize why we are optimistic about the future at Highwoods. The office business as a whole is under stress—leasing, portfolio metrics, cash flows, access to capital, et cetera. But during periods of stress, the best positioned companies rise to the top and eventually thrive. We're well positioned to capitalize on dislocations in the office sector. Our high-quality SunBelt portfolio is located in the best markets and BBDs. Our balance sheet is among the strongest in the sector, and our team is cycle-tested and excited about the future opportunities that will arise.

Thank you, Ted, and good morning, everyone. Our leasing team was active for the quarter with our largest four markets, each signing over 100,000 square feet. In the aggregate, we signed over 655,000 square feet to continue the trend of expansions outnumbering contractions 3:1 for the quarter, with 73% of leasing activity for the quarter and 60% year-to-date occurring in our suburban BBDs. We believe this supports our simple and steadfast strategy of delivering commute-worthy workplace experiences in both urban and suburban best business districts. Our 16% payback was the lowest since the third quarter of 2022, while free rent was only 4.3% of the cash term, the lowest ratio since the third quarter of 2020. As Ted mentioned, these strong leasing economics translated into healthy net effective rents trending above our pre-pandemic average. While we are seeing the cyclical demand headwinds of a lower growth environment, Labor Day marked the next phase of return to the office initiatives, an uptick in physical occupancy with insurance, financial services, and telecom leading activity for the quarter. Now let's turn to our markets, and in particular, the Sunshine state, where our team in Tampa had the highest volume in the quarter with 150,000 square feet signed, and our Orlando portfolio ended the quarter over 92% occupied. CBRE highlighted that the Tampa market saw positive net absorption for the third consecutive quarter and is on pace to have the best year for positive absorption since 2017. Vacancy is down, and there are 2 million square feet of prospects looking for space. Office employment growth remains well above the national average with the Tampa metro ranking first in Florida for year-over-year job growth. As the only new building under construction in the market, Midtown East, our 83,143 square foot development in the Westshore BBD, is seeing good inbound activity as evidenced by the recently signed 20,000 square foot new customer to our Tampa portfolio there. This follows our successful completion and lease-up of our 152,000 square foot Midtown West building, now 100% occupied at rents above our underwriting. In North Carolina, our Raleigh team signed 144,000 square feet in the quarter, and the overall market achieved 248,000 square feet of positive net absorption according to CBRE. We completed our 218,000 square foot GlenLake III mixed-use development on time and on budget, which brings our total GlenLake development to nearly 1 million square feet. Prospect activity is picking up with the ability to tour the space and amenities. We estimate stabilization in early 2026. Down I-85 in Charlotte, our 2 million square foot portfolio is now 95.6% occupied and 97.8% leased. Last year, adjacent to our 33-story Bank of America Tower, we acquired 650 South Tryon, a 367,000 square foot building that was 79% leased upon acquisition and is now 94% leased. The overall market is seeing healthy activity, including continued inbound corporate relocations and is underexposed to sublease availability compared to other markets with equal amounts of space being leased and added to the market in recent quarters according to JLL. The Atlanta team was also busy in the third quarter with 127,000 square feet signed, and subsequent to quarter-end, in an additional 50,000 square feet at Two Alliance and Buckhead, bolstering the backfill of Novelis' Q3 2024 expiration. 2827 Peachtree, our 135,000 square foot development in Buckhead, was delivered on time and on budget at 88.4% pre-leased and is expected to stabilize well before our pro forma stabilization date of early 2025. We believe the quarter's overall leasing stats bear out our simple strategy and resilient portfolio, if even across lower-than-average leasing volume. We continue to witness the evolving consensus between managers and workers on when and where they will be better together. To this point, there are real-time evolutions across the portfolio where customers previously entertained subleasing, then signaled the downsize to then ultimately renew at 100% of their existing footprint. Self-performing our leasing, property management, and maintenance across the majority of the portfolio has given us a unique position to increase the breadth and depth of our customer relationships through the pandemic and into today's choppy waters. Our relative performance in our markets and within our BBDs is bearing witness to this under one roof approach. We will remain proactive in addressing our future lease roll, are committed to delivering meaningful new revenue via our development pipeline, and believe our continued ability to create commute-worthy workplaces yields a resilient portfolio and one positioned to thrive in the future.

Thanks, Brian. In the third quarter, we delivered net income of $22.1 million, or $0.21 per share, and FFO of $99.8 million, or $0.93 a share. Results were in line with our expectations with no significant unusual items. There wasn't much of a change from the second quarter, with overall FFO down $0.01 sequentially. The slight change was driven by modestly lower NOI attributable to higher OpEx and the full quarter impact of dispositions completed in the second quarter and higher interest expense. Our cash flows continue to exhibit resilience even in the face of higher interest rates. We've been highlighting the benefits of our asset recycling program for a few years, but in a year when challenges are more apparent, these benefits become more obvious. So far this year, we've invested over $115 million in our development pipeline while receiving only $40 million of net disposition proceeds and another $40 million from the repayment of our preferred equity investment in our McKinney & Olive joint venture. Said differently, we've been a net investor monetizing income-producing assets while investing in development that isn't yet providing NOI, while holding our debt-to-EBITDA metrics flat at 6x and keeping our overall debt balance essentially unchanged at $3.2 billion. And this doesn't count the approximate $40 million of NOI we expect to garner upon stabilization of the development pipeline. In addition to maintaining strong leverage metrics, we further strengthened our liquidity throughout the year. As disclosed in last evening's press release, our Midtown West joint venture closed a five-year mortgage for $45 million at a fixed interest rate of 7.29%. The net proceeds received from the joint venture were used to pay down our credit facility. This further improves our current liquidity, which is now over $770 million and gives us ample dry powder to fund our $270 million of remaining development expenditures. Since the beginning of the year, we proactively increased our total available liquidity by over $200 million while reducing future investment obligations by $100 million. Our healthy current liquidity, combined with limited near-term debt maturities provides us flexibility, and we do expect additional disposition proceeds in future quarters. However, as mentioned last quarter, we may be opportunistic in raising additional debt capital later this year or next. As Ted mentioned, we've updated our outlook with no change to the midpoint of our FFO range, which is now $3.73 to $3.77 per share. Given our performance to date this year, we revised our same-property cash NOI outlook upward to 0% to plus 1%. All other outlook line items that impact FFO are unchanged, but I will note we expect to be towards the low end of the year-end occupancy range. As we've mentioned before, this is a challenging metric to forecast given it's a point estimate on the last day of the year. A couple of items to keep in mind for the fourth quarter. First, we expect lower operating margins due to pushing some discretionary OpEx late into the year. And second, interest expense is expected to increase due to higher average SOFR rates in the new fixed rate mortgage at Midtown West. Finally, as you know, we plan to provide our 2024 outlook in February when we release our fourth quarter results. In the interim, there are some items I would like to highlight. First, operating margins in future years may move closer to our pre-pandemic average as we absorb the impact of higher inflation across major OpEx line items and portfolio utilization increases. Second, we may be opportunistic in raising additional debt capital, which would likely result in higher interest expense. Finally, we are optimistic that we'll close additional dispositions over the next few months, which would likely be a headwind to FFO in the short term, though could be a net benefit to cash flow. In summary, we're encouraged by the resilience of our portfolio and cash flows have exhibited in 2023 and over the past few years, and we're excited about the future. We have the right portfolio, balance sheet, and team to weather the current environment and excel once the cycle turns. Operator, we are now ready for questions.

Our first question for today comes from Camille Bonnel from Bank of America. Your line is now open. Please go ahead.

Retention in your portfolio overall seems healthy, but leasing volumes continue to slow. I imagine the general economy is weighing on this decision-making process, but can you talk to what you're seeing from your conversations with tenants? For companies who had relocation plans to set up hubs in your markets, are you seeing them start to pull back and focus more on their coastal HQs?

Good morning, Camille, it's Ted, and I can start and if Brian has anything to add. Look, I think general leasing, we continue to have steady tour activity, certainly post-Labor Day. I think the biggest thing for us that we're seeing is the decision-making has just been delayed. It's just taking longer. So I think the CEOs are seeing they're having some hesitation, just the general economic backdrop, the environment we're in. We actually did lose a couple of deals that we thought we were going to get done, and the CEO ended up pulling back and ultimately doing some short-term renewals just to sort of wait out the current economic situation. So, we continue to see inbound. You mentioned new companies coming to our markets. We had signed 10 leases with new inbound customers who are setting up small hubs in our markets across really five different markets. So, we continue to see that in-migration, but the decision-making is definitely taking longer.

Camille, Brian here, one little add-on to Ted, which was the very last point of your question—are we getting a sense that folks are maybe changing their enthusiasm and momentum on the SunBelt kind of relocation or posting and retrenching back to coastal headquarters? I would say the answer is no. Just in general, there are still relocations occurring. We've seen it in Charlotte, where companies are relocating out of gateway. We see it in Dallas continuing. These are corporations moving their whole operations, not just hubs, so just that reversion to the mean has not occurred yet.

Okay. And on Tivity, I appreciate it's still a developing situation. But what's the likelihood that they remain in the same office footprint? Or do you see a risk of them potentially downsizing?

Yes, Camille, again, it's very early. So look, they've been a good customer of ours for a few years. They started out with us at 25,000 square feet and quickly grew to 50,000 square feet. So, it's a very fast-growing company. And so, I think the situation is still fluid. Hopefully, we'll have more. We've met with them a couple of times, understand their business, and the situation they're in. Hopefully, we'll have more to report in the coming months.

Okay. And final question. You've termed out the balance sheet well. So can you provide a latest update on your thoughts around how you're thinking about managing your variable rate exposure, given we are in this higher rate environment?

Camille, it's Brendan. So, I'll take that. What I would say is I think the strategy would be to do what we've done this year, which is to focus more on improving our liquidity. So, we've increased liquidity by $300 million proactively throughout this year. Now, $100 million of that got used up through some developments, so the net liquidity improvement from the beginning of the year to now is up $200 million. And I think we will focus on continuing to improve that liquidity and push out any near-term debt maturities, which we don't have for two years, but that would be the focus. I would say, over worrying about floating versus fixed exposure. However, with all of that, I would say that the capital raising opportunities are probably more on the fixed rate side than the variable rate side. So, I do think that you will see variable rates continue to migrate downward. But really, our focus would be to increase current liquidity as opposed to focusing more on fixed versus variable.

Thank you. Our next question comes from Michael Griffin of Citi. Your line is now open. Please go ahead.

This is Avery Tiras on for Michael Griffin. Just wondering if you can expand on the JV's decision to close on the Midtown West mortgage? And just generally, how are you thinking about encumbrances as a percent of the asset pool or NOI? I mean, clearly, Highwoods is well in compliance with its covenants. So wondering if you could see you continue to tap the secured debt market and just how you balance that versus drawing on your line of credit? And I guess if you have a floor on encumbrances as a percent of NOI or debt?

It's Brendan. I'll take that. Yes, I think as is typical with a JV, our partner would like to put some financing, some longer-term permanent financing beyond the construction facility on that building. Given the success that we had at that building, it is 100% occupied, and NOI is above pro forma. So, it's a very good fact pattern on a building that we started spec in late 2019 and leased up throughout COVID. We made the decision with our partner to go ahead and put a five-year mortgage on that. So that was an easy decision, and that's a lot of capital that gets repatriated back to Highwoods, so it improves our liquidity overall. I would say with the second part of your question, is there additional room to do secured financing over unsecured? There probably is, but I would say that, that probably isn't our preference. I think where we stand now, we're in the mid-80s in terms of our unsecured NOI. While we could probably move that number a little bit, I think our preference would be to look for sources of capital on the unsecured pool as opposed to the secured pool.

That makes sense. And my follow-up question is just on sublease space. So in the past few quarters, you've talked about some larger space takers. I believe you talked about AT&T last quarter basically pulling sublease space they had put on the market originally given these renewed space requirements resulting from return to office mandates. So just wondering if you're seeing any additional examples of this and just generally how sublease is fairing in your SunBelt markets?

Avery, Brian here. I'll take this one. Look, there's still, from a national standpoint, a high watermark for subleasing kind of coast to coast. We have seen the addition of subleasing in our submarkets level off. We've actually seen it decrease across our portfolio of folks doing that. So, for your exact example from the last quarter, we had another one who had it on the submarket. Then they talked about downsizing—I mentioned in my prepared remarks—and they came back and renewed for the full amount. Not in one of our buildings, but a nice print in Tampa, Mitsubishi, United Finance Group opened an 80,000 square foot office in sublease space in Tampa's Westshore market. That's a new-to-market operator that was not there before, and they're taking a big chunk out. So, we are seeing that happen. We are also seeing, again, across the board, not all sublease space is the same, right? So as it moves through its own lease expirations with its initial lease, some of that is moving over to vacancy across the markets. But we do feel like, in general, it's leveling out for now.

Thank you. Our next question comes from Yang Ku of Wells Fargo. Your line is now open. Please go ahead.

Brendan, I think this could be for you. It looks like your same-store guidance increased this quarter, but straight-line year-end occupancy and FFO guidance didn't change. Could you talk about the discrepancy between different items?

Yes. So, I mean I think that's really probably just a toggle between NOI's a little bit better overall and then interest expense is a little bit higher. So those two things kind of offset one another. We probably could have maybe tightened the straight-line outlook a little bit but just kept that number the same. So, there might be a little bias towards that number coming in a little bit more towards the lower end of that range, but we just decided to keep the range, give ourselves a little bit of room on that particular line item.

Okay. Is part of the improvement due to kind of a better-than-expected OpEx?

Yes, that's certainly part of it. I think it's probably the biggest driver, even if we go back to the beginning part of the year. So yes, that is a fair comment. I know we've talked about this really since the onset of the pandemic that forecasting OpEx has been challenging for us. So, we've done better on OpEx than what we had predicted at the beginning of the year. Given that, yes, that's probably the biggest driver as opposed to top line.

Okay. And then just looking out into next year, I know you guys haven't provided guidance yet, but in terms of the impact that utilization has on OpEx margin, how should we think about the magnitude?

Yes, it's a good question. And you're right. I mean, we haven't given guidance and we're not prepared to do that this morning. I guess what I would say is, if you look at kind of where margins have trended this year and what we've talked about, we've seen that margins are probably down. We'll see where the fourth quarter shakes out, but let's call it kind of in the neighborhood of 75 to 100 basis points kind of lower in 2023 versus 2022. So, and utilization, as you point out, that has increased kind of throughout '23 compared to '22. So that's been a driver of it. Inflation has been a little bit higher. Now, we do recoup a lot of that through recovery, but it still does hurt the margin outlook. So as I mentioned in the prepared remarks, I think we believe that there could be some margin pressure as we migrate over the next several quarters given inflation remains relatively high and utilization has been picking up, especially when you compare it to three to four quarters ago.

And just one last question. I think this could be for Ted. Could you guys talk about your federal government leases and whether there are any larger ones that are expiring over the next couple of years and what kind of conversations you've been having with them in terms of renewing potential size of renewal?

Sure. The biggest government lease we have expiring—we've got—it's really a state government. It's the Department of Revenue. We've got in Atlanta about 250,000 square feet or so that we've talked about, that expires at the end of 2024. And that's one we've talked about in terms of—they put an RFP out to downsize, and they're pretty confident they're going to be leaving the building they're in, and we've talked about that. We do think we've got a decent shot at keeping them just moving to another building, but that process is still in place. So that's our biggest exposure. We've got another one that's about 85,000 square feet, that's early 2025. Still don't know what's going to happen there. We've just renewed a couple in Nashville that were probably 60,000 or 70,000 feet in the last couple of quarters. So after that, it's a bunch of smaller government tenants across several of our markets and then just a small exploration role for the next few years other than the two big ones.

And Ted, that 85,000 square feet in early '25, is that a GSA lease?

Yes.

Thank you. Our next question comes from Robert Stevenson of Janney. Robert, your line is now open. Please go ahead.

Are there any incremental known move-outs of size from last quarter coming up?

No, I think we've talked about all of them.

Okay. And then how aggressive are landlords in your core markets today in terms of TI dollars to bolster occupancy? Or are your core markets still staying relatively rational at this point?

Yes. Look, I think it varies by market, by submarket, and by deal, really. It's—obviously, there’s more competition on the big ones because there are fewer large customers these days, but there are certainly some markets—if you go to our top markets, maybe a Brentwood in Nashville, a South Park in Charlotte, which are very tight markets. So, I think the concessions and TI packages aren't as competitive as they are maybe in Buckhead. I think Buckhead right now—the demand is lower, the vacancy is higher. So it's a more competitive situation. It really varies by market, submarket, and deal.

Okay. And then you guys have talked about dispositions and thinking that you're going to be able to close additional dispositions over the next few months. What does that market look like today? I mean can you sell more than what you currently have teed up? Is the market fluid enough, deep enough? And at this point, are the proceeds just going to be used to fund the remainder of the development pipeline? Are you going to be able to reduce debt, and any appetite to repurchase stock with it now under $18?

Yes. I'll take the first part of that; maybe Brendan can jump in on the use of proceeds. But look, the capital markets are incredibly challenging, really for all property types, but especially for the office. I think that's a function of, obviously, the high interest rates today, the constrained lending environment. It's very difficult to get an office loan today. So getting deals across the goal line sold is very hard today. We've sold three assets so far, totaling $51 million. We sold one that was all cash, and two of them did find financing. The assets we have out in the market today are largely for leveraged buyers. In some cases, there are high net worth buyers who have banking relationships. I think that having a banking relationship is incredibly important today to get deals done. So it’s tough to get any assets sold. The nice thing is there is more capital for bite-sized deals, and those are generally what we have out in the market today.

Rob, it's Brendan. I'll just kind of—for the use of proceeds side of that. I mean, I think at the margin, it would be—we would pay down kind of debt, but we do have development spending that's going to go there, so you could sort of toggle those two things. But I would say, I think where we feel good is that cash flow has continued to hold up extremely well even in the face of higher interest rates. So we feel very good about that. We don't—we haven't received any significant NOI contribution from the development that is under construction even with a fairly modest level of financing left to get done or funding left to get done to complete those projects. So, I think we feel like there’s a lot of good embedded growth in the development pipeline, and given that cash flows have held up pretty well, it provides us a lot of optionality with respect to disposition dollars that come in the door.

Thank you. Our next question comes from Georgi Dinkov of Mizuho. Your line is now open. Please go ahead.

Can you just talk about the portfolio mark-to-market today? And how this varies by—sorry, by market?

Georgi, this is Brendan. I'll start and maybe let Brian and Ted give their views on color on the market. But just overall, I mean, I think we would say that it's—let's call it roughly flat, which is kind of on a cash basis, which is where you've seen cash rent spreads be in broad strokes over the past many quarters. So, we think that that’s representative of probably where the portfolio is. If you had to pin us down, we'd say it's modestly positive, but there are some long-term leases in place that are below market. So, I think flat is as good enough a guidepost as any, and maybe I'll turn it over to Ted or Brian to give some color on how we see the different markets.

Yes, I'll jump in first. I mean, look, I think our markets—Tampa is a great market for us right now. We're seeing a lot of good inbound migration to Tampa. So I'd put Tampa and Orlando—the sort of the Sunshine state, Brian mentioned in his prepared remarks—continue to do very well for us. Charlotte and Nashville continue to do well as well. Look, I think from a Raleigh perspective, I think there's a little more sublease space in Raleigh. So that market in a fair amount of new construction as a percent of stock. So I think Raleigh is historically been one of our top two markets. I think right now, there's a little bit more softness in Raleigh. And then Atlanta, I think I mentioned, probably a little bit soft in Buckhead as well. So, and then Pittsburgh and Richmond—Richmond has actually got a fair amount of activity. Our occupancy there is down, but the market vacancy is roughly about 10%. It just so happens we had a fair amount of move-outs in the last couple of quarters, so hopefully, we're rebounding in Richmond.

And just in terms of demand, what have you seen in terms of size and tenant profile?

I think we’re definitely seeing smaller—definitely seeing small and medium-sized users, or—it’s been this trend we've had probably for several quarters now. Last fall, the bigger users went to the sidelines when the Fed started raising interest rates, and we're starting to see some of them come back now, but still a majority of our activity is really our bread and butter. It's that 5,000 to 15,000 square foot customer who's been the most active. And that's really with our expansion of contractions as well. We had expansions outnumber contractions, I think it's 3:1 this quarter, but a lot of it is just small companies that are growing.

Georgi, the sectors are kind of the fire sectors, as we talked about—financial services, insurance, telecom—I see a little bit of TAM in there too, kind of coming back, but the general nature of the users.

Thank you. Our next question comes from Dylan Burzinski of Green Street. Dylan, your line is now open. Please go ahead.

I appreciate the commentary on the situation going on with the Tivity backfill. But I'm just curious if there are any other larger tenants that you guys are worried about from a credit or ability to pay rent perspective?

Dylan, it's Brendan. No, I don't think that's the case. I mean we've got a pretty robust credit review process and watch process. So, I would say that there are—certainly no large ones that are out there. It has—what I would say is kind of overall bad debt expense, if you will, or credit risk has picked up a little bit over the past several quarters, but it's picked up from what was effectively a negligible level. So, any sort of change from a de minimis level feels like it's a large percentage increase even if the overall dollar exposure is relatively modest. So, that’s kind of what we've seen. We've continued to collect greater than 99% of rents every month. That's been consistent since the onset of the pandemic. So, there hasn't been a real big change there. But I would say that bad debts are up a little bit, but from, as I said earlier, effectively zero levels.

And then just maybe going to market rent growth. I appreciate the comments you guys provided in the prepared remarks on net effective rents. But I'm just curious if you're seeing any landlords sort of capitulate and then start to lower the asking rents that they're looking at or looking to achieve in certain buildings?

I think in general, a general comment is face rates have held up, right? It costs more to build out space these days. So TIs are higher. So, I think a lot of customers understand that. And so again, that's one of the reasons we focus on net effective rents. It's throwing everything into the lease economics, whether it be free rent, TIs, or face rents. So, in general, face rents have held up pretty well. Are there instances where some landlords have gotten really aggressive? They’re really more aggressive on the free rent versus lowering the face rate. So, generally holding up, but again, we pay attention to net effective rents.

Dylan, it's Brian. I might just add on this. It might come across a little more philosophical, but we are seeing the bifurcation of flight to quality, flight to capital, flight to landlord. And so, there is a bifurcation of a certain pool of assets that are competing and keeping face rates and getting those net effective. And I would argue that those that aren't relative or commute-worthy, yes, they are probably getting more desperate, but they're not leasing up either. So I'll leave it at that.

Thank you. Our next question comes from Peter Abramowitz from Jefferies. Your line is now open. Please go ahead.

I was wondering if you could just talk a little bit about the supply outlook in your markets for '24, kind of near to medium-term, and how we should think about the impact just to your occupancy and to market rents.

And that's on new deliveries?

Yes, yes.

Yes. That's one of the silver linings. I think you're seeing construction starts go way down. For several of our markets, there is really very little, if any, new construction. In Orlando, there's none. In Tampa, we're the only spec building under construction. Raleigh and Nashville—I mentioned about Raleigh, there's more under construction. They will be delivering in the next really 12 to 18 months. Nashville is really only in downtown. There's new supply coming on in Midtown Atlanta, where we don't have any presence, you've still got some supply coming. So, in general, I think there's a lot less supply coming on than there has been in the last several years. Nothing new is going to get out of the ground—very difficult to finance new construction today. So, I think anything that is delivering between now and the next 18 months is going to have a window to really lease up when the demand starts coming back. So, in general, demand is not as big an issue as it has been for the last several years in our markets, maybe save Raleigh and Downtown Nashville.

Got it. And then in terms of the secured deal at Midtown, can you just talk a little bit about the other avenues of financing that were on the table that you considered? And then I guess just relative attractiveness of what's available in the capital markets right now, kind of what ultimately drove that decision to go that route?

Yes, Peter. So at Midtown West, that is a JV property, right? So that's not a decision that is kind of sold to Highwoods. So we've got to work with our partner in terms of the capital that is appropriate for the venture. So for the venture to term out the construction loan, I mean, it's either kind of going to the secured route or it’s—for the partners. So, I think in that regard, the financing at Midtown West we felt like was an attractive option and our partner felt like that was an attractive option. So that was the decision there. I think with respect to kind of the prepared remarks that I made in terms of thinking about securing additional liquidity as we go forward and looking at those avenues, yes, the options that we have and that we've used over the past several years—we've been in the bond market, if you go back a few years. We've gone to the bank term loan market, and we've gone the secured route. So each of those is still available, but they all present certain benefits and challenges that are there. So, I think we will evaluate, but we do believe that we've got access to capital across a number of different sources, and we'll see what we think makes the most sense for us in the long term. And I should also mention, we also—as I think Ted mentioned and I mentioned, disposition proceeds are another source of capital that's out there as well. So that's another option that's there too, in addition to just kind of raising additional debt capital.

Thank you. Our next question comes from Ronald Kamdem of Morgan Stanley. Your line is now open. Please go ahead.

This is Timmy Martin for Ron Kamdem. Can you guys talk a little bit in the prepared remarks about some of the asset sales? Maybe just give us a sense for what the incremental dilution might be relative to whatever you guys use on the line of credit, just a sense of cap rates and whatnot?

It's Brendan. It's hard—I mean the—I'll maybe let Ted give a little more color in terms of the capital markets. But obviously, they're challenged as it stands right now. We were successful in selling a little over $50 million in the first half of the year. I think those carried an average cap rate of 7%. So, I mean, depending on where deals get done going forward, you'd see kind of that cap rate relative to the debt that we would be paying off, which is largely at what would be our line balance or maybe one of the term loans, which is a SOFR plus, call it, in rough numbers, 100 basis points, so you could do the math there. It will be much more impactful kind of on an FFO basis. What we've seen over the past several years is that a lot of the dispositions that we've done have been accretive on a cash flow basis. So we'll see. You'd never count anything until a deal gets over the finish line, and we'll see where those deal metrics shake out.

Makes sense. And then just the year-around occupancy guidance, I understand it's tough to kind of pinpoint it—to point time at the end of the quarter. But just how are you guys thinking about the wide range there? That was maintained. Just any moving pieces or just what's driving that the high and the low end of the range there?

Yes. I mean there. It's—yes, it's a good question. And I know we talked about this last quarter as well. It is hard because you move a commencement from January to December or vice versa, and it can move the numbers pretty meaningfully because we're talking about a point estimate on the last day of the year. So, some stuff that we moved out last quarter—and I think Ted alluded to it—but there were a couple of deals that we felt like were close to the finish line, which then we don't feel as confident in getting those deals done. So, some of that stuff caused some of the conservatism with respect to kind of the comments and the year-end outlook. But we always keep a fairly wide range there because, like I said, it's just trying to pinpoint a number on the last day of the year is always a little bit challenging.

Thank you. At this time, we currently have no further questions. So I hand back to Ted Klinck for any further remarks.

Thanks, everybody, for joining the call today. Thanks for your interest in Highwoods. We look forward to seeing many of you out in L.A. for NAREIT in a couple of weeks. Thanks again.

Thank you for joining today's call. You may now disconnect your lines.